Libya, Japan, the European debt crisis. Take that last one off the list?

This week, debt felled another European leader as Portugal's prime minister resigned. But the euro currency did not tumble. That's a sign that Europe is finally getting on top of its debt crisis.

As world leaders multi-task over Libya, Japan, and their own economies, one of those tasks looks as if it’s going fairly well. The European debt crisis that shook the world last year – and endangered America’s economic recovery – may be coming under control.

How can we tell? Observe the dog that didn’t bark. This week, Portugal’s national debt crisis forced the resignation of Prime Minister José Sócrates. He’s the second European leader, after Ireland’s prime minister, to be rolled over by fiscal woes. And yet, the euro currency did not tank at this news. Stock markets did not swoon.

This is a sharp contrast to last year, when Greece – teetering on the edge of a debt default – forced down the value of the euro and knocked the air out of the US stock market. American consumer confidence sagged, putting the recovery in danger.

Part of the reason for the shoulder shrug at Portugal is that the financial markets have already calculated that Lisbon will likely need a financial bailout. But, apparently, a shaky confidence has also emerged that Europeans are up to handling a third debt crisis, and shoring up the euro generally.

The reason for this improving confidence is twofold.

First, the Europeans have agreed on a long-term strategy to deal with debt. Since the start of the Greek debacle, the 17 countries that use the euro currency have been working on a solution to help member countries avoid debt default and to get their fiscal houses in order.

Today, they mostly finished that work, signing off on a permanent bailout fund to replace the temporary fund they’re using now. The fund includes new disciplinary rules on how the euro countries will run their economies. It also binds these countries closer together.

Before, member countries tried to apply peer pressure to rein in various government binge spenders whose bad habits threatened the euro as a whole. That didn’t work.

With a permanent fund, those overspenders can now count on help from their fellow members – but only if they get back on the straight and narrow. This is self-interest peer pressure. Those doing the bailing can demand change from the laggards; those being bailed will have to comply if they want to avoid the stigma of an International Monetary Fund rescue or the chaos of default or even leaving the eurozone.

Second, countries in fiscal trouble have been busy in recent months. They’ve taken austerity measures, such as reducing pensions. This is causing great consternation to their citizens, but the steps appear to be reassuring the financial markets, at least for now.

Spain, for instance, was widely expected to be the next in line after Portugal for a bailout. However, Madrid tried to stay ahead of the markets with various reforms. Today its prime minister announced new steps to control the deficit and fight tax evasion. The markets have not driven up Spain’s borrowing costs, as previously feared.

The euro is not out of the woods yet. The strong countries shoring it up, such as Germany and France, have debt problems of their own – but sounder economies. And the danger remains that too much austerity will cut off recovery.

But at least Europe is now showing the will to cope with this crisis, as a union of many countries and as individual members. That’s good news for the world economy, including America’s. If only now the US would get as serious about debt reduction as the Europeans have done.

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